Delhi High Court
Sriram Cables Pvt Ltd vs Union Of India on 22 April, 2024
Author: Neena Bansal Krishna
Bench: Neena Bansal Krishna
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 14th December, 2023
% Pronounced on: 22th April, 2024
+ O.M.P. (COMM) 447/2018, I.A. 14687/2018 (Condonation of delay)
SRIRAM CABLES PVT LTD
..... Petitioner
Through: Mr. Ankit S. Mr. Arnav Kumar and
Mr. Gurdas Khurana, Advocates.
versus
UNION OF INDIA
..... Respondent
Through: Mr. Ashok Singh, Advocate.
CORAM:
HON'BLE MS. JUSTICE NEENA BANSAL KRISHNA
JUDGMENT
NEENA BANSAL KRISHNA, J.
1. The Petition under Section 34 of the Arbitration and Conciliation Act,
1996 (hereinafter "Act, 1996"), has been filed by the petitioner, to challenge
the Arbitral Award dated 23.04.2018, whereby the Claim of the Petitioner,
for a refund of Rs. 2,05,40,091/- on account of wrongful encashment of the
Warranty Bank Guarantees by the respondent, was rejected by the learned
Sole Arbitrator.
2. Briefly stated, the Bid submitted by the petitioner in furtherance of the
Tender floated by the Respondent in July 2015, was accepted for supply of
660 MT of Copper Wire. On 29.09.2015. A Running Contract (RgC No:
CORE/S/1101/5248/20334) was executed between the parties, for supply of
total 660MT of Copper Wire, at the Basic Rate of Rs. 5,02,479.68/-, per
MT. The Basic Rate was subject to Price Variation Clause contained in the
contract document. The Running Contract was valid for a period of one year
i.e. till 28.09.2016. Under the Running Contract, the respondent was
required to place Supply Orders in the name of the Consignees, indicating
the consignee wise quantities and delivery period, in each Supply Order.
3. Pursuant to the Supply Order dated 29.10.2015, the petitioner
delivered 650.865 MT of Goods in total twenty (20) consignments within
the schedule delivery period. The Supply Order was issued on Severable
Contract basis i.e. each consignment amounted to a separate contract with
separate delivery period inter se the parties and a separate Bill was raised
against each consignment.
4. The procedure agreed was that on verification of the Bills and
supporting documents and after due satisfaction, the Paying Authority of the
respondent (i.e. the Financial Advisor and Chief Accounts Officer, CORE
Allahabad) paid 90% of the billed amount to the petitioner. The Goods
before being dispatched were also inspected by the third party Agency (Rites
Pvt. Ltd.) and were found to be inconformity with the contract specifications
and quality standards. The goods received against the 20 bills were duly
acknowledged and accepted by the ultimate Consignee nominated by the
respondent. There was no dispute in regard to the quality and the quantity of
the Goods delivered by the petitioner and all the obligations were discharged
by the petitioner satisfactorily, according to the obligations under the
Contract. Thereafter, the respondent also released the balance 10% of the
payment due under the aforesaid twenty Bills upon furnishing of
corresponding twenty Warranty Bank Guarantees by the petitioner,
according to Clause 27 and 28 of the Running Contract read with Clause 8
of the General Conditions of Contract. Each Warranty Bank Guarantee was
equivalent to 10% of the bill amount.
5. The Warranty Bank Guarantees were issued to guarantee that the
goods delivered by the petitioner, were free from all defects and faults and
were in conformity with the contract specifications and drawings and that
the goods operated properly during the warranty period. The Warranty Bank
Guarantees were valid for a period of 33 months, from the date of delivery
of Goods. However, almost after one year from the date of release of
payment to the petitioner, the respondent issued a letter on 14.02.2017,
alleging over-payments in respect of 17 consignments and threatened to
initiate recovery proceedings against the petitioner. The letter was responded
to by the petitioner and was followed by subsequent exchange of
communications.
6. Eventually, the respondent vide its letter dated 28.04.2017, invoked
Warranty Bank Guarantees and sought encashment of total amount of
Rs.2,05,40,091/-, for which no reason was stated in the letter.
7. The petitioner was thus, compelled to invoke Arbitration Clause
contained in Clause 9 of GCC. The arbitration proceedings were initiated,
in which the petitioner submitted its Claim and the same was contested by
the respondent.
8. Eventually, the learned Arbitrator passed the impugned Award
dated 23.04.2018 inter alia arriving at the conclusions as under:-
"(a) The Petitioner has wrongly applied the Price
Variation formulae contained in the contract document,
as a result of which over-payments have been made by
the Respondent to the Petitioner.
(b) As per Clause 2400 of IRS Conditions of
Contract, the Respondent was contractually and legally
entitled to encash the Warranty Bank Guarantee on
account of alleged over-payments being made to the
Petitioner under the Bills."
9. The Award has been challenged by the petitioner, on the grounds that
it is perverse, unreasonable, patently illegal, against the Public Policy of
India and liable to be set-aside under Section 34 (2) (a)(iv), Section
34(2)(a)(v), Section 34(2)(b) and Section 34(2A) of the Act, 1996.
10. The first ground of challenge is that the learned Arbitrator was
unilaterally appointed by the respondent, without any consultation with the
petitioner. He was an ex-employee of the respondent and had been regularly
advising the respondent. The learned Arbitrator was disqualified under
Seventh Schedule and also lacked inherent jurisdiction to proceed with the
matter and was therefore, ineligible to act as an Arbitrator. Moreover, the
learned Arbitrator failed to file any Declaration, in terms of the Form
specified in the Sixth Schedule of the Act, which is mandatory as it
addresses the independence and impartiality of the learned Arbitrator; the
Award is liable to be set-aside on this ground itself.
11. The second ground of challenge is that the learned Arbitrator failed to
appreciate that the Bank Guarantee could be invoked only for the purpose
for which they were furnished, in terms of the Clause 27 and 28 of the
Contract. The Bank Guarantees were to guarantee that the Goods delivered
by the petitioner to the respondent, were free from all defects and faults and
were in conformity with the Contract specifications during the warranty
period. However, the alleged reason for encashing the Bank Guarantees, was
on account of alleged over-payment, which was not a justifiable reason
under the law or the Contract.
12. The petitioner has further asserted that each consignment for which a
separate Warrantee Bank Guarantee (equivalent to 10% of the billed
amount) was furnished, was issued to cover goods delivered under one
particular bill or one particular consignment and amounted to separate
twenty Contracts. Even if the contention of the respondent about alleged
over payment is accepted, the bank Guarantees could have been invoked
only for that corresponding bill in regard to which over-payment had been
alleged to have been made by the respondent. The respondent, however, has
illegally encashed three Warrantee Bank Guarantees, namely, (i) BG No.
7132IBGISI60025 corresponding to the bill/Invoice No. 575-576 dated
18.01.2016 (ii) BG No. 7132IBGISI60026 corresponding to the bill/ Invoice
No. 577-578-578 dated 18.01.2016 and (iii) BG No. 7132IBGISI60027
corresponding to the bill/ Invoice No. 580-581-582 dated 19.01.2016, even
though no over-payment was alleged by the respondent in regard to these
Invoices. The Warrantee Bank Guarantee was operational only for that
particular Bill and could not have been invoked on account of alleged over-
payment under other Bills. It is thus, contended that the encashment of
Warrantee Bank Guarantees was patently illegal, arbitrary and irrational,
which the learned Arbitrator has overlooked and failed to appreciate in
accordance with the terms of the Contract.
13. The petitioner has contended that by encashing Warrantee Bank
Guarantees, the respondent has indirectly ended up „recovering‟ the money
even before the adjudication of its claim, which is not permissible on the
plain reading of the Clauses of the Contract. The invocation of Bank
Guarantees in law was bad, illegal and non-est.
14. Learned Arbitrator wrongly noted that the Price Variation Formulae
was wrongly applied by the claimant. Furthermore, since the 100% payment
of the bills was made on behalf of the respondent, they are now estopped
from claiming that the petitioner‟s application of Price Variation Formulae,
was not correct. The conduct of the respondent amounts to waiver and
acquiescence and they cannot be permitted to reagitate the wrong
application of the Price Variation Formulae by the petitioner entitling them
to realize the differential amount by invoking the Bank Guarantees. It is an
afterthought having been raised after more than one year of releasing the
entire payments.
15. Furthermore, even though there is no evidence led by the respondent,
the Arbitrator has arrived at a conclusion that the petitioner received over
payment because of manipulation of raw-material Invoices and was guilty of
deficiency of services while performing its contractual obligations. These
findings of the learned Arbitrator are not supported by any evidence.
16. It is, therefore, submitted that the impugned award suffers from the
patent illegality and is based on no evidence and the findings are in
contraventions of the terms of the Contract. Therefore, the impugned award
is liable to be set aside.
17. The respondent in its Reply has submitted that this Court has no
territorial jurisdiction to entertain the present petition as the seat of
arbitration does not give the jurisdiction to this Court. The office and works
of the petitioner is at Alwar, Rajasthan. Moreover, neither the material was
supplied in Delhi nor was the office of the respondent in Delhi. The present
petition is, therefore, liable to be rejected on the ground of lack of territorial
jurisdiction.
18. The respondent has asserted that the issue in the present petition, was
of the overpayment to the claimant and the recovery of the same by
encashing the Bank Guarantees which had been rightly invoked as has also
been endorsed by the Ld. Arbitrator. The procedure of payment was that the
bills of the purchase of raw material from its supplier, were required to be
submitted by the petitioner. Then the inspection which included quality and
quantity of the raw material as per the bills of the petitioner, was required to
be done by the RITES. The price of the Copper as stated in the Purchase Bill
was of vital importance as the same became the basis of rates at which the
payment was to be made to the petitioner. The rate of raw material is the
determining factor for the price payable to the petitioner under PVC.
19. It is submitted that there is a Price Variation Clause and the final
price payable to the claimant is calculated on the basis of the formula which
reads as under: -
"P1 = P+ (CD2 *L2-CD1*L1)
P1 = Final price payable per Metric Tone (MT) in Indian Rupees
P = Price per MT as quoted in contract in Indian Rupees
CD2= Custom Duty at time of import
CD1= Custom Duty at time rate quoted."
20. Since, the petitioner had not imported the Copper and had purchased
the Copper from within India both CD2 and CD1 became one as there is
variation in custom duty and looses relevance in calculations of final price
payable. The above-mentioned formula thus gets simplified to: -
"P1= P+( L2- L1)
L1 = Price of copper as in the Purchase order
L2= Price arrived at stated below.
For the calculation of L2 three prices of the Copper are relevant."
21. Average monthly LME cash settlement rate per MT for the month, 3
months prior to date of offering for inspection for lot. LME stands for
London Metal Exchange rate.
a) LME cash settlement (Mid Day) rate on the date of invoice.
b) Invoice rate in Invoice of Actual purchase.
c) L2 is the minimum of price, A, B and C.
22. It is the price B which was very relevant as the same is generally less
than the price A and C. This price B varied with the date. Price B is the
LME price on the date of invoice. It is the price of London Metallic
Exchange as on the date of invoice and the date of the invoice is very vital
for arriving at price B which keeps on varying daily.
23. The petitioner is claimed to have committed fraud in respect of price
B which is the LME price on the date of Invoice. It is asserted that the raw
material Invoices produced by the petitioner at the time of inspection were
different from those that were submitted by the petitioner for claiming
payments. The rates of Copper were shown to be higher by the petitioner
intentionally in order to extract more money from the respondent. The
Accounts Department at Allahabad was not aware and relying on the bills
along with the attached raw material invoices, made the calculation and the
over-payments got made to the petitioner at the time of final payment. It is
asserted that the petitioner had indulged in unethical business practices and
had manipulated the Final Bill and is not entitled to any relief.
24. It is further submitted that the ground of challenge under Section 34
of the Arbitration and Conciliation Act, 1996 is limited and the petitioner
has failed to show any valid ground for challenging the impugned Award
and the present petition is liable to be dismissed. Reliance has been place on
the decision in ONGC vs. Saw Pipes (2002) 1 SCC 594.
25. Moreover, the Petition under Section 34 is not equivalent to an
Appeal as has been held in the cases of The President, Union of India &
Another vs. Kalinga Construction Co. (P) Ltd., AIR 1971 SC 1646,
Hindustan Tea Co. vs. K. Shashikant & Co., AIR 1987 SC 81, R.K. Khanna
& Others vs. International Airport Authority of India & Others, 1995 (1)
Arbitration Law Reporter 148, State of Madhya Pradesh vs. Babu Lal
Pathak, AIR 1974 Madhya Pradesh 179, Comibatore District Podu
Thozillar Samgam vs. Bala Subramania Foundry & Others, AIR 1987 SC
2045.
26. On merits, it is submitted that the Arbitrator has been appointed as
per the terms of Contract. It is denied that he was regularly advising the
respondent or was ineligible to act as the Arbitrator according to Schedules
5 and 7 of the Arbitration and Conciliation Act, 1996. It is also denied that
the Arbitrator did not file the requisite Declaration under the Act or he
lacked inherent jurisdiction to act as an Arbitrator.
27. It is denied that the Bank Guarantee could be encashed only in case of
breach of obligation under the Bank Guarantee and not for the breach of the
terms of the Contract. It is claimed that the petitioner was guilty of filing
wrong Invoices and also the PVC calculations; the law of estoppels is not
attracted in cases where the petitioner itself is guilty of concealment, fraud
and presenting wrong documents. The petitioner itself has averred that the
respondent had waived its right of overpayment, which implies that the
petitioner also admits that there were overpayments made to the petitioner.
Furthermore, the Arbitrator had rightly held that the overpayments had been
made to the petitioner because of wrong application of Price Variation
Formula and the Award calls for no interference.
28. The respondent has further denied that the Ld. Arbitrator has
incorrectly upheld the decision of the respondent to encash the Bank
Guarantees or that such finding of the Ld. Arbitrator suffers from non-
application of mind or is contrary to the terms of the Contract.
29. It is, therefore, submitted that the present petition is without merit and
is liable to be dismissed.
30. In the Rejoinder to the Reply of the Respondent, the Petitioner has
reiterated its assertions and has submitted that the stand of the respondents is
merely evasive and vague and they have not been able to address any of the
objections raised in the present Petition with respect to the unilateral
appointment of the Ld. Sole Arbitrator (ex-employee of the Petitioners) as
well as non-filing of the Declaration as mandated under the Act, 1996,
which gives rise to justifiable doubts as to his independence and impartial. It
has also been reiterated that the Warranty Bank Guarantees were specific in
nature and could have been encashed only in case of breach of its warranty
obligations and admittedly, the Respondent, till date, has not raised single
dispute regarding the quality or quantity of the goods supplied. Thus, there is
error apparent on the face of award as the Ld. Sole Arbitrator has failed to
understand the import of the Running Contract and the Terms of the GCC as
well as the Bank Guarantees, calling for setting aside of the Impugned Award.
31. To buttress the above arguments, the learned Counsel for Petitioner has
placed reliance on the decisions in Perkins Eastman Architects DPC vs. HSCC
(India) Ltd., (2020) 20 SCC 760, Bharat Broadband Network Ltd. vs. United
Telecoms Ltd., (2019) 5 SCC 755, Ram Kumar and Anr. vs. Shriram Transport
Finance Co. Ltd. 2022/DHC/005313, Govind Singh vs. M/s Satya Group Pvt.
Ltd., 2023/DHC/000081, Ruia Exports & Anr. vs. Moneywise Financial
Services Pvt. Ltd., O.M.P. (COMM.) 16/2020 decided by the Co-ordinate
Bench of this Court on 18.01.2023, Kotak Mahindra Bank vs. Narendra Kumar
Prajapat 2023:DHC:3705-DB, Man Industries (India) Ltd. vs. Indian Oil
Corporation Ltd., 2023:DHC:3875, Hanuman Motors Pvt. Ltd. & Anr. vs. M/s
Tata Motors Finance Ltd. Arbitration Petition 241/2022, Bombay High Court
and Cholamandalam Investment and Finance Company Ltd. vs. Amrapali
Enterprise and Anr. EC 122/2022, Calcutta High Court.
32. Submissions heard and judgments perused.
33. The respondent, at the outset in its Reply to the present petition, has
taken a preliminary objection in regard to the maintainability of the present
petition by claiming that in terms of the Clause 9 of GCC, the territorial
jurisdiction does not lie with this Court and therefore, the present petition is
liable to be rejected on this ground itself.
34. Clause 9 of GCC provides for Arbitration. Sub-clause (g) of Clause 9
of GCC reads as under: -
"Clause 9(g): The venue of arbitration shall be the place from
which the acceptance note (supply order) has been issued or such
other place as the Arbitrator at his discretion determine."
35. Clause 12 of the GCC deals with the jurisdiction of the Courts which
reads as under: -
"Clause 12: - The courts at Allahabad (U.P.) shall alone have
the jurisdiction to decide any dispute arising out of or in respect
of the Contract. No deviation in this regard will be acceptable."
36. In the present case, the learned Arbitrator got appointed in Delhi and
the arbitration proceedings were also conducted in Delhi, thereby implying
that he decided the "venue" of arbitration as Delhi, in accordance with
Clause 9(g) of the GCC. Additionally, the petitioner has it‟s registered
office of works in New Delhi and the cause of action arose in Delhi as the
bills along with the invoices were dispatched from Delhi, the payments were
received by the Petitioner at Delhi and the Warranty Bank Guarantees were
encashed by the Respondent at Delhi. Though, Clause 12 of the Agreement
provides for jurisdiction of the Courts but in Clause 9 (g), which specifically
deals with arbitration, it is nowhere provided that the seat of arbitration shall
be at Allahabad.
37. The controversy about the "seat" and "venue" has been arising
frequently since the Act 1996 does not specifically use either word vis.,
"seat" or "venue" but uses the word "place". In the case of Bharat
Aluminium Co. vs. Kaiser Aluminium Techincal; Serivce, Inc., (2012) 9 SCC
552, the Constitution Bench of the Supreme Court observed that Section 2
(1)(e) of the Act 1996 only defines the Court, the Act 1996 has to be
construed keeping in mind Section 20 of the Act 1996, which gives
recognition to party-autonomy. The legislature has intentionally vested
jurisdiction with two courts, i.e., the court which would have the jurisdiction
where the cause of action arose, and the courts where the arbitration takes
place. This was necessary as on many occasions, most of the Agreements
provide for a seat of arbitration at a place which would be mutual to both the
Parties. Therefore, the Courts, where the arbitration takes place, would be
required to exercise supervisory control over the arbitration proceedings.
38. In the BSG SGS Soma JV. v. NHPC Ltd. (2020) 4 SCC 234,
following the Roger Shashoua v. Mukesh Sharama (2009) EWHC 957, the
Apex Court laid down the test for determination of the seat which reads as
under -
" It will thus be seen that wherever there us an express
designation of a "venue" and no designation of any
alternation place as the "seat", combined with a
supranational body of rules governing the arbitration
and no other significant contrary indicia, the inexorable
conclusion is that the stated venue is actually the
juridical seat of the arbitral proceedings."
39. The above judgment of BGS Soma (Supra) forms the locus classicus
on the issue. While dealing with the issue of maintainability of petitions
preferred under Section 34 of the Act 1996, which had been instituted before
the Faridabad courts, the core issue arose as to whether the seat of
arbitration was liable to be construed as New Delhi or Faridabad . Akin to
the factual matrix of the present case, the proceedings of the Arbitral
Tribunal had taken place and a unanimous award was pronounced at New
Delhi but the objections under Section 34 were filed before the District and
Sessions Judge, Faridabad in the State of Haryana. It was held that the
challenge before the Faridabad courts had been wrongly instituted,
competent court was that of New Delhi, being the seat of arbitration.
40. The Co-ordinate Bench of this Court in Reliance Infrastructure Ltd. v.
Madhyanchal Vidyut Vitran Nigam Ltd., 2023 SCC OnLine Del 4894
observed that a generic jurisdiction clause in an Agreement would not
supersede or override the supervisory jurisdiction of the Courts, and held as
under:-
" 32. On a conspectus of the aforesaid judgments, the position
of law that emerges is that when the contract contains an
arbitration clause that specifies a "venue", thereby anchoring
the arbitral proceedings thereto, then the said "venue" is
really the "seat" of arbitration. In such a situation the courts
having supervisory jurisdiction over the said "seat" shall
exercise supervisory jurisdiction over the arbitral process,
notwithstanding that the contract contains a clause seeking to
confer "exclusive jurisdiction" on a different court."
41. From a perusal of the above judgments, it becomes evident that where
ever is the „seat‟ or „place‟ of arbitration as determined by the Learned
Arbitral Tribunal, that Court would have jurisdiction to entertain the
application under Section 34 of the Act, 1996.
42. . In the present case as well, in Clause 9(g), it was specifically
provided that the venue of arbitration shall be the place from which the
Acceptance Note is issued or such other place as the Arbitrator at his
discretion may determine. The Supply Orders have been issued from
Allahabad, Uttar Pradesh to the petitioner at Delhi, therefore, it can easily be
held that the Acceptance Note was issued from Delhi.
43. Furthermore, the Learned Arbitrator has conducted the entire
proceedings in Delhi, to which no objection at any point of time has been
taken on behalf of the respondent. Pertinently, even in the Reply filed by the
respondent in the present proceedings, the respondent has stated that the seat
of the arbitration does not impart the jurisdiction to this Court thereby
implying that the respondent has also not denied that the seat of arbitration
was in Delhi.
44. It can easily be inferred that the arbitration proceedings having been
conducted in Delhi, the seat and venue both were in Delhi, the objection
taken on behalf of the respondent in regard to the territorial jurisdiction of
this Court to entertain the present Petition under Section 34 of the Act, 1996
is untenable. The present petition has been rightly filed before this Court,
which has the jurisdiction to entertain the same.
45. Essentially, there are two challenges which have been raised by the
petitioner under Section 34 of the Act 1996 i.e. (i) Arbitrator was a
disqualified under Fifth and Seventh Schedule of the Act, 1996, and (ii)
encashment of Warranty Bank Guarantees against its terms.
(i) Disqualification of the Ld. Arbitrator under Fifth and
Seventh of the Arbitration and Conciliation Act, 1996: -
46. An objection has been taken on behalf of the petitioner that the
Arbitrator, who was unilaterally appointed by the respondent without
consulting the petitioner, was an ex-employee of the respondent. He had
been regularly advising the respondent and no Declaration in terms of the
Form specified in the Sixth Schedule of the Arbitration and Conciliation
Act, 1996 has been filed by the Arbitrator.
47. While the Act, 1996 recognises the autonomy of the parties to choose
their own Arbitrator in terms of their Agreement, it also countenances that
fairness, transparency and impartiality are the virtues which are equally
important incidents for consideration in the appointment of the Arbitrator.
The autonomy conferred on the parties is not unbridled and any appointment
of the Arbitrator has to meet the prerequisite of his neutrality and
impartiality which are the bedrock on which the foundation of arbitration
rests.
48. In the case of Voestalpine Schienen GMPH vs. Delhi Metro Rail
Corporation Limited (2017) 4 SCC 665, it was held that under Section 12(5)
of the Act, 1996, notwithstanding any prior agreement to the contrary, any
person whose relationship, with the parties or counsel or the subject-matter
of the dispute, falls under any of the categories specified in the Seventh
Schedule, shall be ineligible to be appointed as an arbitrator. It was further
observed that the validity of an appointment procedure which clearly
contemplates appointment of an arbitrator by only one party without any
counterbalancing of that power by giving the other contracting party any say
in the choice of arbitrator to be appointed, would also fall foul of Section 12
(5) read with Seventh Schedule of the Act, 1996. It would be apposite to
highlight that the Apex Court disapproved of a Panel of Arbitrators from
which the other party may select an arbitrator as it "created room for
suspicion".
49. Further, while analysing the impact of appointment procedures
wherein one contracting party is in a comparatively more dominating
position, this Court in Margo Networks (P) Ltd. Vs. Railtel Corpn. of India
Ltd 2023 SCC OnLine Del 3906 and CMM Infraprojects Ltd. Vs. IRCON
International Ltd 2021:DHC:2578 and Pankaj Mittal Vs. Union of India
Order dated 16.12.2021 passed by this Court in ARB.P. 607/2021, has
observed that the arbitration appointment procedure under which "the scales
are tipped in favour of the respondent" would inherently be in contravention
with the object of Section 12 (5) read with Seventh Schedule of the Act,
1996.
50. Thus, applying the above crystallized principles of law in the present
case, it becomes imperative to analyse the validity of the procedure of the
appointment of the arbitrator and whether the same was clearly in
contravention of the Scheme of the Act, 1996.
51. Clause 9 of the GCC envisaged Arbitration procedure, which is
reproduced hereunder :-
"9. Arbitration
a) In the event of any question, dispute or difference arising
under these conditions or any special conditions of contract,
or in connection with this contract (except as to any matters
the decision of which is specially provided for by these or
the special conditions) the same shall be referred to the
sole arbitration of a Gazetted Railway Officer appointed to
be the arbitrator, by the General Manager in the case of
contracts entered into by the Zonal Railways and
Production Units; by any Member of the Railway Board, in
the case of contracts entered into by the Railway Board and
by the Head of the Organisation in respect of contracts
entered into by the other Organisations under the Ministry
of Railways. The Gazetted Railway Officer to be appointed
as arbitrator however will not be one of those who had an
opportunity to deal with the matters to which the contract
relates or who in the course of their duties as railway
servant have expressed views on all or any of the matters
under dispute or difference. The award of the arbitrator
shall be final and binding on the parties to this contract.
b) In the event of the arbitrator dying, neglecting or
refusing to act or resigning or being unable to act for any
reason, or his award being set aside by the court for any
reason, it shall be lawful for the authority appointing the
arbitrator to appoint another arbitrator in place of the
outgoing arbitrator in the manner aforesaid.
c) It is further a term of this contract that no person other
than the person appointed by the authority as aforesaid
should act as arbitrator and that if for any reason that is not
possible, the matter is not to be referred to arbitration at
all.
d) *****
e) *****
f) *****
g) *****
h) *****"
52. Arbitration Clause 9(a) of the GCC provides that the arbitrator
would be a Gazetted Railway Officer, who would be appointed by the
General Manger in the case of contracts entered into by the Railway Board
and production units; by any Member of the Railway Board in case of
contracts entered into by the Railway Board ; by the Head of Organization in
of contracts entered into by the other Organizations under the Ministry of
Railways. Hence, the appointing Authority is clearly the Respondent, which
indicates without an iota of doubt, that the scales evidently tipped in the
favour of the Respondent leading to reasonable concerns about the
arbitrator's impartiality. Further, Clause 9(b) provides that in case the
Arbitrator so appointed by the Respondent, is incapable or unable to act and
discharge his duties, the power to freshly appoint another Arbitrator would
also vests with the Respondents solely. Additionally, Clause 9(c) provided
that no person other than the person so appointed by the respondents, would
act as an Arbitrator and in such a case the dispute would not be referred to
arbitration at all.
53. A cumulative appraisal of the above clauses clearly demonstrates that
the procedure for appointment was only a "one -way" procedure and the
power to single handily decide who would be the Arbitrator, only vested
with the Respondents. There never existed even a shred of counterbalancing
of this unilateral power as the Petitioners had no role to play in this
procedure, whether it was initial appointment or substitution in case the
Arbitrator became disabled to act an any arbitrator at any subsequent stage.
The absolute power of appointment was assumed by the respondent is
further evident from Clause 9(c) which contained an "My way or High Way"
attitude as it provided that there would be no arbitration in case the
respondent does not appoint the arbitrator. Such unilateral appointment
arbitrators have been judicially proscribed, irrespective of whether the
arbitrator appointed is not biased and or not prejudiced. The procedure for
appointment of arbitrator was Unilateral with no participation by the
petitioner, is hit by Section 12(5) read with Seventh Schedule of the Act,
1996.
54. Principles of natural justice play a critical role in avoiding any
potential risk of miscarriage of justice as arbitration requires adjudication on
rights of the parties involved. The first principle of natural justice is „nemo
judex in causa sua‟, which means „no man can be a judge in his own cause‟
which is the basis of any „reasonable apprehension of bias‟ that may arise
during any judicial process.
55. In the case of Voestalpine (supra), it was observed that in such an
eventuality, i.e., when the Arbitration Clause finds foul with the amended
provisions, the appointment of an arbitrator would be illegal, empowering
the court to appoint such arbitrator(s) as may be permissible. While
emphasising on the independence and impartiality as the hallmark of any
arbitration proceedings, it was observed that if the Arbitrator appointed is
found to be non-independent or non-impartial, his appointment shall be
rendered ineligible in terms of the Arbitration and Conciliation Act, 1996.
The rationale behind this rule is that the Arbitrator has an adjudicatory role
to perform and therefore, must be independent of the parties as well as be
impartial.
56. The Apex Court in the case of Perkins Eastman Architects DPC &
Anr. vs. HSCC (India) Ltd. AIR 2020 SC 59, recognised the importance of
ensuring that the Arbitrator having an interest in the outcome of the matter is
not appointed so as to obviate any doubt as to the impartiality or
independence of the Arbitral Tribunal.
57. The test for determination of competence of the Arbitrator proposed
to be appointed, was laid down by the Apex Court in the case of TRF Ltd.
vs. Energo Engineering Projects Ltd. (2017) 8 SCC 377, "whether he would
have an interest in the outcome of the dispute". The element of eligibility
was relatable to the interest that he may have in the decision.
58. Section 12 read with Schedules V and Schedule VII of the Act, 1996
read with S.12(1)(b) specify the categories of persons who can or cannot be
appointed as arbitrators. the grounds on which the eligibility of the arbitrator
can be challenged, are primarily governed by Section 12 read with the Vth,
VIth and the VIIth Schedule.
59. The Fifth Schedule (read with Section 12(1)(a) of the Act, 1996 lists
the various instances and circumstances that create justifiable doubts in the
mind with respect to the independence and impartiality of the sole arbitrator
or the panel of arbitrators appointed. It broadly discusses the conditions
when the arbitrator is doubted for its impartiality or being biased towards
one of the parties or the relationships of the arbitrator with the other parties.
60. The Fifth Schedule read with Section 12(2) of the Act, 1996 provides
specifically that the Arbitrator at the time of his appointment and throughout
the arbitral proceedings shall, without delay, disclose to the parties in
writing any circumstances referred to in Sub-Section (1) unless they have
been informed of them by him.
61. The Sixth Schedule of the Act, 1996 provides the format in which the
said Declaration is to be given. It provides that the past or present
relationship or interest in any of the parties or any relationship to the subject
matter in dispute has to be disclosed. It is also required to state if it had any
financial business or professional association of any kind which was likely
to give rise to justifiable doubts as to their independence. Thus, to ensure the
sanctity of an arbitral proceeding, Section 12 of the Act, 1996 read with
Schedule VI underlines the importance of disclosure to maintain the
independence and impartiality of an Arbitrator.
62. Unlike the Fifth Schedule, the Seventh Schedule (read with Section
12(5) of the Act 1996) relates to instances which directly result in the
"ineligibility" of a person from being appointed as an arbitrator and de jure
disqualify him from being appointed as an arbitrator unless the parties had
expressly waived the applicability of the provision in writing after the
agreement was entered into.
63. In the case of HRD Corporation (Marcus Oil and Chemical Division)
vs. GAIL (India) Limited (Formerly Gas Authority of India Limited) (2018)
12 SCC 471, the Apex Court had explained the scope of Schedules V and
VII in the context that Section 12 of the Arbitration and Conciliation Act,
1996. It has been observed that if a person falls in any of the categories as
specified in the Seventh Schedule, he becomes ineligible to act as Arbitrator
and the ineligibility goes to the root of the appointment, making such
Arbitrator de jure ineligible to be an Arbitrator. It was further observed that
Items 1 to 19 of the Fifth Schedule are identical with the aforesaid items in
the Seventh Schedule. The only reason that these items also appear in the
Fifth Schedule is for purposes of disclosure by the arbitrator, as unless the
proposed arbitrator discloses in writing his involvement in terms of Items 1
to 34 of the Fifth Schedule, such disclosure would be lacking in material
particulars, in which case the parties would be put at a disadvantage as such
information is often within the personal knowledge of the arbitrator alone. It
is for this reason that it appears that Items 1 to 19 also appear in the Fifth
Schedule.
64. In the present case, firstly, the respondent in its Reply to this
objection, neither has given any explanation nor is it asserted that the
Declaration under Section 12 of the Act, 1996. Apart from a vague denial,
no averment has been made that the mandatory Declaration under Section 12
of the Act, 1996 as per the prescribed form in the Sixth Schedule, was ever
made by the Arbitrator. The records of the Arbitrator have been stated to be
unavailable by the Arbitrator vide his Affidavit dated 09.06.2023. The vague
denial without there being any explanation from the respondent, can only
lead to one inference that no requisite Declaration had been filed by the Ld.
Arbitrator. Pertinently, the Petitioner at no stage, had waived the
applicability of Section 12(5) of the Act,1996. Merely because the petitioner
had not raised any objections to the unilateral appointment in the arbitral
proceedings, would not make the appointment valid. Since this
disqualification goes to the root of the proceedings, such plea has to be
addressed in the present Petition under S.34 of the Act.
65. Further it has been held in the case of Hindustan Zinc LTD. v. Ajmer
Vidyut Vitran Nigam Ltd. (2019) 17 SCC 82 that an objection to the
unilateral appointment can be taken for the first time at any stage or in the
collateral proceedings, including an Appeal under Section 37 of the Act,
1996.
66. Secondly, it is not disputed that the Learned Arbitrator was an ex-
employee of the respondent. There is specific averment made by the
petitioner that the Arbitrator was regularly rendering the respondent‟s
advisory work which again has only been vaguely denied without any
further explanation. Thus, the inevitable conclusion is that this is a clear case
where the procedure of appointment itself provided for unilateral
appointment and also that the Arbitrator was an ex-employee of the
respondent, which is against the express mandate of Section 12 read with
Seventh Schedule of the Arbitration and Conciliation Act, 1996. Such
unilaterally appointed Arbitrator inherently lacked jurisdiction to adjudicate
and it vitiates the entire arbitral proceedings making the Award non-est.
67. The Arbitral Award dated 23.04.2018 is, therefore, liable to be set
aside on this ground of ineligibility of the Arbitrator, being a unilateral
appointment.
(ii) The Warranty Bank Guarantee encashment has been done
against the terms of the Warranty Bank Guarantees: -
68. The second ground agitated on behalf of the petitioner is that each
Bank Guarantee was an Independent Contract for independent Invoices and
consignments and the same could have been enchased only in accordance
with its terms. The respondent, however, has encashed it not for any of the
reasons as stipulated in the Bank Guarantee, but for recovery of the alleged
overpayments made to the petitioner by the respondent, under the Contract.
Thus, the learned Arbitrator erred in upholding the invocation of Bank
Guarantee which is against the Fundamental Law of the Land and the
findings are perverse which are in conflict with the Law and also the facts of
the case. In fact, the findings in respect of the Bank Guarantees are not
supported by any evidence and the Bank Guarantees have been interpreted
in contravention of its terms.
69. The respondent on the other hand, has justified the invocation of
Bank Guarantee by saying that it has been done in terms of the Contract, to
realise the amounts that were found outstanding against the petitioner. It is
claimed that there is no perversity in the findings of the learned Arbitrator
and this objection taken by the petitioner, is not tenable.
70. To comprehend the challenge to the Bank Guarantee, it would be first
pertinent to understand the nature of the Bank Guarantee.
71. The commercial transactions of the nature involved in the present
Petition, were riddled with several complexities including high commercial
gains and losses and run the risk of losses on account of non-performance or
delay in performance of contractual obligations, amongst other challenges.
In the commercial transactions, the interest of the parties in securing the
payments under the Commercial Contract, is paramount. The Contract of
Bank Guarantee is one such mechanism to mitigate the chances of losses
and recovery of the due amounts because of non-performance or default in
performance of contractual obligations.
72. Generally, in a Bank Guarantee there exist three parties i.e. the
Creditor, the Debtor and the Bank. The Bank Guarantee is an independent
Agreement wherein the obligation of the Bank is absolute and distinct from
the underlying Contract in respect of which any dispute may arise between
the parties.
73. The independent nature of the Bank Guarantees was highlighted in the
case of Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works
(P) Ltd., (1997) 6 SCC 450, wherein it was observed that when in a course
of commercial dealings, an unconditional Bank Guarantee is given or
accepted, the beneficiary is entitled to realize such a Bank Guarantee in
terms thereof irrespective of any pending disputes. The Bank giving such a
Bank Guarantee is bound to honour it, as per its terms as the very purpose of
giving such a Bank Guarantee would otherwise be defeated.
74. Similarly, in the case of Svcnska Handelsbanken vs. Indian Charge
Chrome Ltd., (1994) 1 SCC 502, the Apex Court observed that what is
important is that the Bank Guarantee should be in unequivocal terms,
unconditional and recite that the amount would be paid without demur or
objection and irrespective of any dispute that might have cropped up or
might have been pending between the beneficiary under the Bank Guarantee
or the person on whose behalf the Guarantee was furnished. The terms of the
Bank Guarantee are, therefore, extremely material. It represents an
independent contract between the Bank and the beneficiary, both being
bound by the terms thereof. The invocation, therefore, will have to be in
accordance with the terms of Bank Guarantee, or else, the invocation itself
would be bad.
75. The only exceptions recognised for injuncting the invocation of bank
guarantee were explained in the case of Hindustan Steelworks Construction
Ltd. vs. G.S. Atzval & Co. (Engineers) (P) Ltd., (1996) 5 SCC 34, wherein
the Supreme Court while reiterating that in case of an unconditional Bank
Guarantee, the obligation of the Bank is to pay the amount, on its
invocation, further explained that the only exceptions recognised for
injuncting the invocation of bank guarantee is fraud or the special equities.
Determination of the disputes inter se the parties in terms of the Contract, is
not a consideration for the Bank to deny or refuse to pay the amount, on
invocation of bank guarantee by the Creditor.
76. Another ground where the Courts may interfere and restrain
encashment of Bank Guarantee was specified in the case of Ansal
Engineering Projects Ltd. vs. Tehri Hydro Development Corporation Ltd.,
(1996) 5 SCC 450, wherein the Apex Court further added the principle of
irreparable injury to the already recognised two categories of fraud and
special equity.
77. After referring the various Judgments, the Apex Court pithily
summed up the position of Bank Guarantee in the case of Larsen Toubro
Ltd. vs. Maharashtra SEB (1995) 6 SCC 68, by observing:
"the Rule is well established that a bank issuing a
guarantee is not concerned with the underlying Contract between
the parties to the contract. The duty of the bank is created by the
documents itself. Once the documents are in order the bank giving
the guarantee must honour the same and make payment
ordinarily. The Courts shall also not interfere directly or
indirectly to withhold payment or else the trust in commerce
internal and international would be irreparably damaged. In case
of breach of terms of contract, the parties are at liberty to get their
disputes resolved through litigation or Arbitration. The remedy
arising ex-Contractu too is not barred and the cause of action for
the same is independent of enforcement of the bank guarantee."
78. In the case of Continental Construction Ltd. and Anr. Vs. Satluj Jal
Vidyut Nigam Ltd. (2006) SCC OnLine Del 56, the Coordinate Bench of this
Court concluded that a Bank Guarantee must be strictly invoked in its terms
by a person empowered to so invoke it under the terms of the Guarantee.
79. In the case of Biba-Chem Private Ltd. vs. Hi-tech Carbon & Anr.,
1995 (34) DRJ 520, this Court had observed that the Court is only to
consider the terms of the Deed of Bank Guarantee and no other document to
decide whether it has been invoked in consonance with the terms contained
therein. Once, it has been invoked in accordance with its terms, other
questions would become wholly irrelevant. Issues of Bank Guarantee,
therefore, have to be decided only on the basis of the terms of the Guarantee
itself making it completely separate from the main Contract. It would not be
appropriate to go through the terms of the main Contract to find out as to
whether there was any breach of Contract or that the plaintiff has suffered
any loss in the performance of its obligations by the plaintiff and therefore,
was justified in compensating itself for its losses by invoking a Bank
Guarantee. It is, therefore, evident that the Bank Guarantee is an
independent Contract and is governed by the terms contained therein. The
Reference to the terms of the underlying Contract, cannot be made in order
to consider whether the Bank Guarantee had been invoked justifiably.
80. In the light of the aforesaid principles, the facts of the present Case
may be now considered. Clause 8 of General Conditions of Contract
(GCC) which provided for Warranty/Guarantee, reads as under:-
"8. Warranty/Guarantee:
(a) The contractor/Seller hereby covenants that it is a
Condition of the Contract that all goods/stores/articles
furnished to the Purchaser under this contract shall be of
the highest grade, free of all defects and faults and of the
best materials, quality, manufacture and workmanship
throughout and consistent with the established and
generally accepted standards for materials of the type
ordered and in full conformity with the contract
specification, drawing or sample, if any and shall, if
operable, operate properly.
(b) The contractor also guarantees that the said
goods/stores/articles would continue to conform to the
description and quality as aforesaid, for a period of 30
months after their delivery or 24 months from the date of
placement in service whichever shall be sooner, and this
warranty shall survive notwithstanding the fact that the
goods/stores/articles may have been inspected, accepted
and payment therefore made by the Purchaser.
(c) If during the aforesaid period, the said
goods/stores/articles be discovered not to conform to the
description and quality aforesaid or have deteriorated,
otherwise that by war and tear, the decision of the
Purchaser in that behalf being final and conclusive and that
the Purchaser will be entitled to reject the said
goods/stores/articles or such portions thereof as may be
discovered not to conform to the said description and
quality. On such rejection, the goods/stores/articles will be
at the Seller‟s risk. If the Contractor/Seller so desires, the
rejected goods may be taken over by him or his agents for
disposal in such manner as he may deem fit within a period
of 3 months from the date of such rejection. At the expiry of
the period, no claim whatsoever shall lie against the
Purchaser in respect of the said goods/stores/articles, which
may be disposed of the foregoing, all the provisions in the
Indian Railways Standard Conditions of Contract relating
to the rejection of stores and failure and termination and
clause 3100-02 above shall apply.
(d) The contractor/Seller shall, if required, replace the
goods or such portion thereof as have been rejected by the
purchaser, free of cost, at the ultimate destination, or at the
option of the Purchaser, the Contractor/Seller shall pay to
the Purchaser, the value thereof at the contract price and
such other expenditure and damage as may arise by reason
of the breach of the conditions herein being specified.
Nothing herein contained shall prejudice any other right of
the Purchaser in that behalf under this contract or
otherwise."
81. Twenty Performance Bank Guarantees had been admittedly furnished
independently by the petitioner according to Clause 8 of GCC read with
Clause 27 and 28 of the Running Contract, in respect of 20 Invoices for 20
Consignments, pursuant to the Running Contract dated 29.09.2015, under
which the Supplier was required to furnish Bank Guarantee for warranty
plus three months additional time (33 months in all) to the extent of 10% of
value of the Contract in Railways Standard Acceptable Form. These bank
guarantees were to guarantees that the said goods/stores/articles would
continue to conform to the description and quality as aforesaid, for a period
of 30 months after their delivery or 24 months from the date of placement in
service whichever shall be sooner, and this warranty shall survive
notwithstanding the fact that the goods/stores/articles may have been
inspected, accepted and payment therefore made by the Purchaser.
Therefore, these BGs were for the specific purpose to ensure that quality and
quantity of goods supplied conformed to the specifications and could be
invoked only if the goods were found to be non-conforming during the
warranty period of 33 months. It was absolutely independent of the
payments under the Running Contract.
82. The terms of the Warranty Bank Guarantee were unequivocal and
categorically provided in its Clause 4 of the Warranty Bank Gurantee,
No.7132IBGIS160025 dated 17.02.2016, (which is similar in all Bank
Guarantee), reproduced as under:-
"2. AND WHEREAS according to the terms of the said
Contract, it has been stipulated that payment of balance
10% of the value of the stores would be made, provided
that the seller furnishes to the purchaser Bank Guarantee
from a recognized schedule Bank, acceptable to the
purchaser for 10% of the value of the said contract, valid
for a period covering I full the guarantee period as per
the warranty clause of the said conditions of the contract,
being the condition attached to and forming part of the
contract.
4. That in consideration of the promise and at the
request of the said sellers, we hereby irrevocably
undertake and guarantee to pay to the Government of
India at such other place as may be determined by you
forth with on demand and without any demur merely on
demand from the Government stating that the amount
claimed is due by way of loss or damage caused to or
would be caused to or suffered by the Government by
reason of breach by the said contractor(s) of any of
terms or conditions contained in to perform the said
agreement, or by reason of the contractor(s) failure to
perform the said agreement any sum up to a maximum
amount of Rs.25,30,059/- (Rupees Twenty Five Lacs
Thirty Thousand Fifty Nine Only) representing 10% of
the value of the stores dispatched under the said contract
in case the sellers make default in paying the said sum or
make any default in performance, observance or
discharge of the guarantee contained in the said
contract."
83. Each Bank Guarantee had a reference to its payment Bill as is evident
from all the Bank Guarantees and Clause 8 of the Bank Guarantee
No.7132IBGIS160025 dated 17.02.2016, for reference, is reproduced as
under:-
"8. This Bank Guarantee comes into force when the
balance 10% (Ten percent) of the value of the stores
shipped, as per G.R.No.1903-1904 Dated 18.01.2016 and
date of receipt of material is on 22.01.2016 under the said
contract, has been paid and will remain in full force and
effect upto 22.10.2018 i.e. for 33 months counted from the
date of receipt of material.
*******
11. That no claim under this Guarantee shall be
entertained by us unless the same has been preferred by
the Government within the said date."
84. From the terms of the Warranty Bank Guarantee, it is evident that
these Bank Guarantee had been furnished against the independent Invoices
as a Guarantee of the conditions attached therein. The Warranty Bank
Guarantee, therefore, was to ensure that the goods furnished under the
Contract were of highest grade, free of all defects and faults and consistent
with the established and generally accepted standards for material, at the
time they were ordered. Each of the Bank Guarantee was to be kept alive for
33 months from the date of delivery of goods to ensure that they are free
from any defects. The Performance Guarantee, therefore, was only as a
Guarantee for the quality of the goods during the Warranty period of 33
months. By the very nature of a Bank Guarantee it could have been invoked
only if after the supply of goods, there was any defect found during the
Warranty period of 33 months.
85. Significantly, in the present case, it has been categorically admitted by
the Respondents that there were no defects found in the goods entitling the
respondent to encash the Bank Guarantee. There is no dispute with respect
to the quality and the quantity of the goods, as per the terms of the Contract.
86. The Bills of the material along with the bill of purchase of raw-
material(Copper) in support thereof, were duly submitted by the petitioner.
These bills and the corresponding raw-material invoices, were duly
considered by the Accounts Department of the respondent and the payments
were made to the petitioner. Admittedly, all the payments against the bills
including of the Final Bill that were raised, had been cleared by the
respondent.
87. According to the respondent, subsequently at the time of inspection
by the RITES, it was found that over payment had been made against the
respective 20 Bills on account wrong application of the Price Variation
Formula based on manipulated rates of Copper/raw-material and that the
petitioner had submitted different Invoices for claiming payments. It was
thus, realised that there was an over payment against the various bills, as
detailed hereunder:-
S.No. WBG No. WBG Bill No. Alleged Status of
Amount overpayment WBG
1. 7132IBGIS160002 34,48,955/- 500-501-502 6,23,983/- Encashed
2. 7132IBGIS160050 16,35,496/- 653 21,27,695/- -
3. 7132IBGIS160031 11,98.149/- 551 11,14,213/- -
4. 7132IBGIS160051 11,90,086/- 652 15,34,567/- -
5. 7132IBGIS160028 12,03,229/- 549-550 11,14,500/- Encashed
6. 7132IBGIS160047 11,20,177/- 642 13,15,320/- -
7. 7132IBGIS160030 6,01,989/- 548 5,57,418/- Encashed
8. 7132IBGIS160027 17,84,453/- 580-581-582 * Encashed
9. 7132IBGIS160045 14,95,323/- 647-649 19,45,480/- -
10. 6004IBGIS160091 14,17,763/- 699-701 5,22,487/- Encashed
11. 7132IBGIS160026 17,85,979/- 577-578-579 * Encashed
12. 6004IBGIS160114 18,38,762/- 744-745 1,33,499/- Encashed
13. 7132IBGIS160001 9.05,035/- 518-519 1,57,958/- -
14. 7132IBGIS160029 18,07,065/- 545-546-547 16,72,254/- Encashed
15. 7132IBGIS160025 25,30,059/- 575-576 * Encashed
16. 7132IBGIS160052 5,98,135/- 655 7,73,707/- -
17. 7132IBGIS160048 26,72,817/- 646-650 16,84,432/- -
18. 7132IBGIS160046 18,72,188/- 639-644-645 14,59,233/- -
19. 6004IBGIS160199 14,30,627/- 1&2 1,02,500/- Encashed
20. 6004IBGIS160049 26,91,210/- 640-643- 36,08,071/- Encashed
648651
Total 3,32,27,497/- 2,05,40,091/-
88. The respondent thus, invoked 11 Warranty Bank Guarantees in order
to adjust the alleged over-payments of Rs.2,05,40,091/- which has been
made by the respondent against the bills that were raised by the petitioner.
89. What emerges from the Chart mentioned above, is that even though
over-pricing was allegedly done in respect of certain bills, the Warranty
Bank Guarantees invoked are not of the corresponding Invoices, but had
been invoked randomly against any Invoice, even if there was no over
payment in regard to it, in order to realise the entire alleged amount which
according to respondent, had been paid wrongly. For example, there was no
overpayment in regard to Invoices at serial no. 8, 11 and 15 despite which
the BGs have been encashed. Likewise, though there is alleged overpayment
in respect of Invoices at Serial No. 2, 3, 4, 6, 9, 13, 16, 17 and 18 but the
corresponding BGs have not been encashed.
90. As has been already discussed above in detail, the Bank Guarantees
being specific independent Contracts governed by the terms contained
therein, could have been unconditionally invoked in case the quality of the
goods after the delivery was found to be defective during the Warranty
period of 33 months from the date of supply of goods. It is quite evident that
the Bank Guarantees have been invoked by the respondent in contravention
of the Fundamental Law relating to encashment of Bank Guarantees in
violation of the terms of the Performance Bank Guarantees and the GCC and
the Running Contract between the parties. The remedy with the respondent
in case it felt that their invoices were over billed or that the over payment
had been made, was to raise its claim for recovery of the overpaid amount
but it could not have invoked the Bank Guarantees in contravention of its
terms. In fact, Legal Notice dated 14.02.2017 had also been sent seeking
clarification on alleged over-payment in Bills of Supply and initiating
recovery action of alleged over-payment.
91. The learned Arbitrator has referred to Clause 2400 under Indian
Railway Standard Conditions of Contract (IRS-CC) to hold that the
respondent was entitled to retain the amount or part thereof, wherever any
claim for payment arises out of or under the Contract against the Contractor.
Since the excess payment was detected on post auditing, the respondent was
entitled to encash the Bank Guarantees and retain the money.
92. Clause 2400 under Indian Railway Standard Conditions of Contract
(IRS-CC) relied by the learned Arbitrator, is reproduced as under:-
"2400. Withholding and lien in respect of sums
claimed.
Whenever any claim or claims for payment of a sum of
money arises out of or under the contract against the
Contractor, the Purchaser shall be entitled to withhold
and also have a lien to retain such sum or sums in whole
or in part from the security, if any, deposited by the
Contractor and for the purpose aforesaid, the purchaser
shall be entitled to withhold the said cash security
deposit or the security, if any, furnished as the case may
be and also have a lien over the same pending
finalization or adjudication of any such claim. In the
event of the security being insufficient to cover the
claimed amount or amounts or if no security has been
taken from the Contractor, the Purchaser shall be
entitled to withhold and have lien to retain to the extent
of the such claimed amount or amounts referred to supra,
from any sum or sums found payable or which at any
time-thereafter may become payable to the Contractor
under the same contract or any other contract with the
Purchaser or the Government pending finalization or
adjudication of any such claim.
It is an agreed term of the contract that the sum of money
or moneys so withheld or retained under the lien referred
to above, by the Purchaser will be kept withheld or
retained as such by the Purchaser till the claim arising
out of or under the contract is determined by the
Arbitrator (if the contract is governed by the arbitration
clause) or by the competent court as prescribed under
clause 2703 hereinafter provided, as the case may be,
and that the Contractor will have no claim for interest or
damages whatsoever on any account in respect of such
withholding or retention under the lien referred to supra
and duly notified as such in the Contractor."
93. From the bare perusal of the above Clause, it is evident that this
Clause would get invoked only for "withholding" and for "lien to retain" in
respect of claims raised by the Purchaser, only when there exists a whole or
in part, a security amount which has been furnished by the Contractor. The
said security amount, in part or whole, would be withheld or retained, if
furnished, pending finalization or adjudication of any of such claims raised
by the Purchaser against the Contractor. In case the security amount
furnished is insufficient to cover the entire claim or no security has been
taken by the Contractor, the Purchaser shall be entitled to withhold and have
lien of such claim amount or amounts referred to from any sum or sums
found payable under the same Contract, pending finalization of the
adjudication of the disputes.
94. In the present case, it is pertinent to refer to the Running Contract
dated 29.092015 that was entered into between the parties. Vide Clause 29
the parties agreed to waive off "Security Deposit" as the firm was an RDSO
approved source for tendered items and the tendered items were non-safety
items. Therefore, under the Running Contract, the deposition of security
amount, as provided under Clause 2400, had been expressly waived off.
Once, there was no security amount available with the respondent, the
Clause 2400 could not have been possibly invoked it, in the first place.
95. It is also pertinent to observe that the lien could have been exercised
on entire or part of the security amount, only if it was found that there was
something which was payable or there was a dispute in regard to the amount
to be paid by or to the respondent.
96. In the present case admittedly, the Final Payment under the Running
Contract had been made after due verification of the Bills. It is only
subsequently, that the respondents allegedly on post audit found over-
payment against certain bills. As already observed above, in case any over
payment had been made, then the respondent should have raised a dispute
for adjudication rather than being a judge of its own cause and use its
dominant position to encash the Bank Guarantees in contravention of the
specific conditions stated therein.
97. The other aspect which is evident is that as per Clause 27 and 28 of
the Running Contract, the supplier was required to furnish BG for warranty
period plus three month‟s additional time to the extent of 10% of value of
Contract in Railways Standard Acceptable Form. It is quite apparent that
the Bank Guarantees required to be furnished under Clause 28 were
independent of the security deposits. Moreover, as already discussed above,
each Bank Guarantee was an independent Contract governed by its own
terms. The clause applicable to security deposits could not have been made
applicable to the Bank Guarantees, as has been done by the learned
Arbitrator. This interpretation as given by the learned Arbitrator is
absolutely contrary to the terms of the Contract itself and suffers from a
patent illegality. The learned Arbitrator fell in error of law in equating
security with Bank Guarantee and treating them as interchangeable.
98. Similar situation was considered by a Co-ordinate Bench of this Court
in Bharat Sanchar Nigam Ltd. vs. Teracom Ltd. OMP (COMM) 431/2019,
wherein it was observed that there is no principle in law whereby the
respondent cannot be permitted to retain the Performance Guarantee as
security after the performance of the Contract has been acknowledged.
99. In the present case as well, the Bank Guarantees have been encashed
because the respondent after post auditing, concluded that there was over
payment on account of manipulation of invoices. The encashment was not in
terms of BG on account of quality or quantity of the goods being found not
in accordance with the terms of the Contract during the Warranty period of
33 months, but on account of alleged over payment under the Contract as
admittedly the payments had been already made against the Final Bill. From
the submissions of the respondent itself, it is evident that the Bank
Guarantee had not been invoked in accordance with the terms contained
therein.
100. The scope of a challenge under Section 34 of the Arbitration and
Conciliation Act, 1996 is limited to the grounds stipulated in Section 34 as
held in MMTC Limited v. Vedanta Ltd, (2019) 4 SCC 163. Comprehensive
judicial literature on the scope of interference on the ground of Public Policy
under Section 34 was postulated in Associate Builders vs. DDA, (2015) 3
SCC 49. The Apex Court placed reliance on the judgment of ONGC v. Saw
Pipes, 2003 (5) SCC 705 to determine the contours of Public Policy wherein
an award can be set aside if it is violative of „The fundamental policy of
Indian law‟, „The interest of India‟, „Justice or morality‟ or leads to a
„Patent Illegality‟.
101. For an Award to be in line with the „The fundamental policy of Indian
law‟, the Tribunal should have adopted a judicial approach which implies
that the Award must be fair reasonable and objective and in accordance with
the law of the land. The ground of „patent illegality‟ is applied when there
is a contravention of the substantive law of India, the Act 1996 or the rules
applicable to the substance of the dispute.
102. In Hindustan Zinc Limited vs Friends Coal Carbonisation, (2006) 4
SCC 445, the Apex Court referred to the principles laid down in Saw Pipes
(supra) and clarified that it is open to the court to consider whether an
Award is against the specific terms of contract, and if so, interfere with it on
the ground that it is patently illegal and opposed to the public policy of
India.
103. The Apex Court in the case of Ssangyong Engineering &
Construction Co. Ltd. Vs. National Highways Authority of India AIR 2019
SC 5041 has exhaustively dealt with the expression "patent illegality" and
which acts of the Arbitral Tribunal would come within the purview of patent
illegality. The only correct interpretation of a contract would be if no
reasonable person could have arrived at a different conclusion while
interpreting the relevant clauses of the contract and that any other
interpretation would be irrational and in defiance of all logic, however, the
findings would suffer from the vice of irrationality and perversity if the
Arbitrator arrived at his findings by taking irrelevant factors into account
and by ignoring vital clauses of the contract. Hence, the Apex Court held
that the court could intervene and review the merits of an award if it is found
to be on wrong interpretation of the Contract and thus, 'patently illegal'.
104. Though construction of the terms of a contract is primarily for an
Arbitrator to decide, but if the arbitrator construes the contract in such a way
that it could be said to be something that no fair-minded or reasonable
person would do, the Award would suffer from patent illegality, making it
liable to be set- aside under Section 34 of the Act 1996.
105. In the present case, the findings of the learned Arbitrator, allowing the
encashment of the Bank Guarantees by relying upon Clause 2400 of IRS-
CC is completely not only against the express provisions of the Contract
which did not authorise the respondent to encash the Bank Guarantee merely
on the allegations of over payment to the petitioner, but is clearly against the
Fundamental Law and suffers from patent illegality in being absolutely
contrary to the terms of Contract and the law on encashment of BGs.
Therefore, the Award is liable to be set-aside on this ground as well.
Conclusion:
106. The Petition under Section 34 of the Arbitration and Conciliation Act,
1996 is therefore, allowed and the Arbitral Award dated 23.04.2018 is
hereby set-aside. The parties are at liberty to seek appropriate remedy under
the Law for redressal of their dispute.
(NEENA BANSAL KRISHNA)
JUDGE
APRIL 22, 2024/RS
